RSM offers tax time tips for cash-strapped construction businesses
Without proper planning, construction businesses can find themselves frustrated by cash flow issues when tax time comes around, RSM said.
RSM urged construction businesses to build adequate cash flow buffers into their operations to account for unexpected costs and late payments, noting that construction firms often get caught out with liquidity problems at tax time.
“Build in buffers. Be realistic, even conservative, with your forecasts - but not too conservative,” RSM partner Patrick McMaster wrote in a release.
“There is a balance to strike: if you bake in too much delay or risk, the project might not even get off the ground on paper. But if you don’t allow enough, you’ll be scrambling when real-world issues hit.”
Construction firms have faced numerous recent challenges including high interest rates, supply chain disruption and a complex, evolving regulatory environment, all of which can erode businesses’ cash reserves and make planning for the future more complex.
Property developers often underestimate the timing of their tax obligations, in particular GST and income tax, McMaster said. When unexpected challenges come up including late payments and unexpected costs, cash flow issues could stymie even the most profitable construction projects.
RSM noted that many construction businesses fell into the pitfall of involving their tax advisors too late, limiting opportunities to plan ahead.
Tax planning windows don’t stay open for long, legislation changes rapidly and projects move quickly. Without adequate planning time, tax advisors would struggle to help companies make timely decisions on whether to defer income, accelerate deductions or explore concessional super contributions, McMaster warned.
The tax system itself could sometimes spark cash flow issues, he added. For example, under GST withholding rules, a company is required to pay GST to the ATO immediately, but it can take up to four months to reclaim GST credit from the ATO.
RSM also highlighted that while many developers reinvest as they go, this can leave them exposed to tax obligations without proper planning.
“It is a classic case of looking forward without covering what's behind,” McMaster wrote.
Having plans to prevent and manage cash flow strain is critical throughout the early and middle stages of development, RSM said. Cash flow buffers and conservative forecasts could help construction businesses avoid major liquidity issues sparked by minor timing mismatches.
“When it comes to property development, people often assume that if a project is profitable, cash flow won’t be a problem,” McMaster wrote.
“I’ve seen plenty of developers fall into that trap, only to realise that profits and available cash don’t always go hand in hand.”
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